An economic analysis on what is happening in the South African Motor industry.


Economics 101 Essay 1


18 march





12:20























Abstract


The purpose of the essay is to give you a critical view on what is really happening within the car industry and I plan to demonstrate and illustrate what happens to the demand and the supply of entry-levelled vehicles in the situation of the motor vehicles being over priced in the face of weakening foreign currencies and a strengthening Rand. The issue was addressed by looking at forecasts as well as the relationship between the demand and supply determinants and backing up the motor industries theories. Conclusions were drawn based on the outcome of the simultaneous demand and supply determinants as well as statistics over recent years proving theories.











Introduction


With there being decreases in the Dollar, Euro and Yen, the prices of motor vehicles are still consistently on the increase as well as “tariffs in South Africa being reduced as well as local content requirements either being relaxed or abolished” (Black and Mitchell, 2002:23), the price of manufacturer input costs have decreased meaning that the quantity demanded of these inputs has increased and with this in mind, there is a sense of intervention of competitive manufacturers because this increases the quantity supplied but this year there has still been an increase in quantity demanded by the general public because of competitive rivalry as well as lower interest rates in 2004 but the influence of foreign produced goods lead to eventual price reductions.


Quantity demanded and quantity supplied for new vehicles in the industry with regard them being over priced.


The demand for motor vehicles may be influence by forecast conditions put out by the National Association of Automobile Manufacturers of South Africa. Before, the economic analysis was taking place but the consumer population forecast expected future price increases with full knowledge of the decrease in manufacture import prices, they made use of substitute models within the industry leading to a decrease in quantity demanded of expensive models decreasing the gross profit of the car makers and causing a shift in the demand curve to a decrease left. “It is expected that people will continue to by less expensive goods, and these sales could represent almost a set percentage of the total market by period end.”(Black and Mitchell, 2002:34).


With this being said, this year the competitive rivalry within the motor industry is “forcing narrower margins and smaller price increases” (Business Times, 2001). From the start of this year (2004), there hasn’t been a price increase and this is because of the reduction in interest rates making cars more affordable and so the public can now afford to buy the vehicles.


The supply of vehicles increased because of the fact that the price of motor vehicle inputs have decreased due to foreign exchange weakening and boosting imports and so there will be a shift in the demand curve to an increase right. This level of quantity supplied increased and with the quantity demanded decreasing and so there were simultaneous shifts of the two curves at the same price level causing and this led to . (Black and Mitchell, 2002:27) .There was also an increase in sales at a discounted overpriced rate as well as improvements in technology.


The situation of an increase in quantity supplied may eventually lead to a situation of over supply and may be forced to reduce prices in the face of foreign cheaper competition as a result of their fierce import competition. (Moneyweb, 2004)





Unfair or fair?


Last year, there was an increase in price by 2% (Moneyweb, 2004). This year there has been a general increase in quantity demanded with an increase in annual sales by 18% (Standard Bank, 2004) and this brings in the argument on behalf of the Marius Burger (Toyota vice president) and this is because he had the view that the prices were fair in the long term and the prices have been forecasted to work out this year to the correct pricing and without being under priced.


Another reason for the price increases in the short run is because there has been exchange rate erosion over the last 30 years and in the short run, the current bout of strength in the rand hasn’t made up for that erosion and so there is a